Qualcomm (NASDAQ:QCOM) has done well since the start of the year - the stock is up over 7%. Qualcomm's position is extremely strong in the mobile segment and we believe that interesting opportunities are building up in favor of Qualcomm, which will prove to be highly beneficial in the short-medium term. The opportunity is mainly coming from China as the biggest telecom company in China creates the biggest opportunity of the year in the mobile segment.
Qualcomm is Well-Positioned to Benefit from the Opportunity
China Mobile (NYSE:CHL) is a giant in the Telecommunication industry with 775.6 million customers. It has recently announced that it will offer discounts on the smartphones which operate over faster networks. This will massively increase the demand for the faster network oriented smartphones. The smartphone in focus here are the ones which operate on five-mode connectivity i.e. TD-LTE, TD-SCDMA, GSM, FDD-LTE and WCDMA. Currently, most of the smartphones in the market are operating on 3-mode connectivity which leaves out the last two pieces of technology mentioned above i.e. FDD-LTE and WCDMA.
Qualcomm has the 5-mode chipsets readily available while most of the vendors in China are working to prepare their own chipsets. This gives Qualcomm an advantage in the market for the short-term as there is only one competitor at present, Marvell technology group (NASDAQ:MRVL). Other than these two companies, no other company is providing 5-mode chipsets at present. This puts Qualcomm in a potentially profitable position.
China Mobile believes that it will sell about 100 million devices for the LTE high-speed data services by the end of the year. Further, the analysts expect Qualcomm to have a market share of 70% while Marvell would have about 15%. Rest will be divided among the remaining players in the market. The Royalty fee charged by Qualcomm per device is 3.3%. If Qualcomm is able to get the expected 70% market share; the boost to the revenues will be massive in the short-term. The stock has been growing rapidly, but the benefits which Qualcomm is about to get from this short-term opportunity will be huge, and we believe it will support the continued rise in the stock price.
Risk Associated with the Opportunity
Some major players like Intel (NASDAQ:INTC), NVIDIA (NASDAQ:NVDA) and Broadcom (BRCM) are working on the LTE chipsets eligible for the China Mobile subsidy. They will penetrate the market soon which gives Qualcomm a short-term window of opportunity.
Chinese government has always been greatly involved in every business segment operating in the country and keeps them highly regulated. The current position of Qualcomm gives it Monopoly over other vendors, which is discouraged by the Chinese government. There have been many cases where the Chinese government has intervened in such monopolistic opportunities to give other firms a fair competition. This poses a risk to Qualcomm because if the government intervenes, it will have to settle for less. Even then, the company will have to considerably increase its revenues, and subsequently, its profits. But the unregulated position of the company would bring exceptional returns if the government does not step in.
There is certainly a short-term opportunity present for the company which will allow it to substantially enhance its revenues. Furthermore, there have been rumors that Qualcomm is the winner with the launch of Samsung's new Galaxy handset. It is rumored the handset uses the Qualcomm application processor plus the modem chip. These both opportunities will go a long way in enhancing the revenues of the company. However, as the company has lower operating leverage and spends a substantial amount in research and development; we might not see a proportional rise in the margins Nonetheless, the opportunity should add to the continued revenue growth and the stock should continue its impressive progress over the next few months.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.